Utility tokens are not a “bad idea”

In his February 8, 2018 opinion piece, Santander’s Julio Faura suggests that “utility tokens are a bad idea” because it would be a “lie to ourselves” to suggest ICOs were not actually selling securities. Rather, in Mr. Faura’s opinion “we should collectively work on a framework to build a clearly defined scheme for ICOs, recognizing from the very beginning that they are securities.” And, this “ICO process should be designed in collaboration with regulators to comply with securities law.” Mr. Faura’s opinion piece does not exist in a vacuum. In a report dated February 5, 2018, Goldman Sachs Group Inc.’s global head of investment research suggests that investors in ICOs could possibly lose their entire investments – which ties to Mr. Faura’s underlying premise that ICOs should be regulated “to protect investors”.

It is not clear how his proposed hybrid solution would ever get implemented given it requires complete buy-in from capital markets and regulators so would be a non-starter from day one – why would existing financial institutions and regulators scuttle existing methods of raising capital or attempt to squeeze ICOs under traditional securities law even if considered a sale of securities? Answer: They would not. Ripple – a company partially funded by Santander InnoVentures, offers a glimpse on how traditional financial markets will compete using blockchain technology.

One ICO left untouched by the SEC was “gate keeped” by Perkins Coie and involves an ICO for a utility token that raised $35 million in under a minute’s time. This “BAT utility token” creates a digital advertising ecosystem tied to consumer attention – which is why it is the “Basic Attention Token”. Such ecosystem would certainly be an upgrade from the current digital advertising scheme wedded to the Web ecosystem of 1995.

Recent public SEC statements seem to back this interpretation of their ICO position. On February 6, 2018, SEC Chairman Jay Clayton recently testified that the potential derived from blockchain was “very significant” – his co-witness, CFTC Chairman Christopher Giancarlo, went so far as to say there was “enormous potential” that “seems extraordinary” for blockchain-based businesses. Yet, during his testimony, Chairman Clayton said the SEC would continue to “crack down hard” on fraud and manipulation involving ICOs offering an unregistered security. This is consistent with prior messaging given that Chairman Clayton requested on December 11, 2017 that the SEC’s Enforcement Division “vigorously” enforce and recommend action against ICOs that may be in violation of the federal securities laws. The fact some 2017 ICOs raising hundreds of millions of dollars were not addressed by the SEC, however, provides a clear “nudge wink” that not all ICOs come under SEC regulatory control.

As with BAT, in the future, there will likely be many more utility tokens built on disruptive blockchain initiatives that escape SEC scrutiny given they are not perceived as securities. The fact that the SEC has not yet moved on them – despite moving against Munchee, Inc. weeks after the Munchee MUN offering, signals the SEC will temper its enforcement activities when faced with a disruptive blockchain initiative that begets true intrinsic value. In other words, utility tokens may very well be a good idea after all.